IRS Releases Update on Frequently Asked Questions Part 4: The Low-Income Taxpayer Perspective

Today we welcome back guest blogger Ted Afield, Professor of Law at Georgia State University, with the fourth installment in our mini-series on IRS FAQ.

The IRS’s mission, in its own words, is to “Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.” Taxpayers reading this mission statement are not being unreasonable in believing that fulfilling the service side of this mission includes at least some obligation to explain to taxpayers what the tax laws are and how taxpayers are expected to comply with them. Indeed, a service-focused mission would also suggest that, to the extent that the IRS does provide an explanation of the tax laws that turns out to be incorrect, the IRS would make at least some effort to mitigate the impact of its mistake, such as through acknowledgement and correction of the error and through ensuring that taxpayers are not penalized for relying on an IRS explanation.

As has been noted numerous times on this blog and elsewhere, however, this has sadly not been the case in the context of one of most commonly utilized IRS methods of explaining the tax law: the FAQ.  Rather, historically, the IRS has taken the position that it would do its best through FAQs to provide quick and clear guidance to taxpayers, but that essentially taxpayers should rely on those FAQs at their peril, as there would be no relief if the guidance turned out to be incorrect.


As Professors Joshua Blank and Leigh Osofsky have pointed out in an upcoming article in the Vanderbilt Law Review titled, The Inequity of Informal Guidance, that the approach that the IRS taken to this type of informal guidance is “a social justice issue. . . [because] the two tiers of formal and informal tax law systematically disadvantage taxpayers who lack access to sophisticated advisors.”  As Professors Blank and Osofsky correctly observe:

This imbalance occurs irrespective of whether the IRS’s tax guidance contains statements that, if taxpayers followed them, would be taxpayer favorable or unfavorable.  When the guidance contains taxpayer-favorable positions the IRS is not legally bound by these positions and, during an audit, can contradict or ignore them.  When the guidance contains taxpayer-unfriendly positions, taxpayers who rely on them are bound to these interpretations as a practical matter.  Worse yet, these taxpayers have almost no protection against tax penalties for incorrect positions that they claimed based on the IRS’s tax guidance.

While these inequities can of course be experienced by taxpayers at a variety of income levels, they are most acutely felt by the most economically vulnerable members who interact with the tax system.  Furthermore, the inequity is exacerbated by the fact that Congress increasingly uses the tax system to distribute economic relief in periods of economic crisis. This means that new areas of tax law in which the IRS is attempting to provide FAQ guidance as quickly as possible are areas of the law that are specifically designed to provide critical social safety-net benefits to vulnerable taxpayers who are most in need of a clear explanation that shows them what they must do to receive these benefits.  The National Taxpayer Advocate described the extent of this problem as just as it related to the COVID-19 relief provisions here:

The Coronavirus relief provisions provide a good example of the useful role of FAQs. There is no end to the questions that have arisen under the Families First Coronavirus Response Act, the Coronavirus Aid, Relief, and Economic Security Act, and the IRS’s People First Initiative. It would not have been feasible for the IRS to address most of those questions through published guidance, at least not quickly. By our count, the IRS has posted nearly 500 COVID-19-related FAQs on its website, including 94 on the employee retention credit, 93 on the Families First Coronavirus Response Act (via a link to the Department of Labor website), 69 on Economic Impact Payments, 67 on COVID 19-related tax credits, and 40 on filing and payment deadlines.

For a more specific example, see here for a discussion of how the IRS provided incorrect FAQ guidance for the eligibility of incarcerated and non-resident taxpayers for economic impact payments during the first round of COVID-19 stimulus).  This approach represented more than just poor service—it violated at least four of the Taxpayer Bill of Rights: the right to be informed; the right to quality service; the right to pay no more than the correct amount of tax; and the right to a fair and just tax system.  Indeed, as Professors Alice Abreu and Richard Greenstein have noted, given that the IRS would remove and replace FAQs without warning and without an archive, it “may also violate the taxpayers “Right to Challenge the IRS’s Position and Be Heard,’” which would cause it to violate half of the listed taxpayer rights in TBOR.

Thankfully, the IRS last week took a significant step in rectifying this inequity, with the publication of IR-2021-202 (October 15, 2021).  Through this notice, the IRS has indicated that it will make the following changes to its FAQ practices:

  1. Publishing FAQs as separate Fact Sheets that will be dated so that taxpayers will know when FAQs are modified.
  2. Allowing taxpayers who reasonably rely on FAQ guidance in good faith to have a “reasonable cause” defense against negligence or accuracy related penalties if the FAQ is incorrect as applied to that taxpayer

This notice represents an important change from the “heads, the IRS wins; tails, the taxpayer loses” historical approach to FAQs and is a welcome development for all taxpayers, but particularly so for those taxpayers who lack the resources to pay for professional tax guidance and nevertheless rely on benefits administered through the tax code for their economic security.  Inevitably, however, commentators will turn their attention to the question of whether this fix solves the problem or whether it only represents the first step towards an even more equitable solution.

As Professors Abreu and Greenstein have argued here, perhaps the IRS should be encouraged to go beyond simply allowing reliance for the purposes of penalty protection and should be encouraged to “stand by its [sic] all of its written, publicly announced, positions until it announces that it has changed positions, and it should do so for all purposes, not just for penalty protection.”  There is considerable appeal to this argument, but part of me wonders whether this could potentially backfire on economically vulnerable taxpayers. Requiring that the IRS stand by all written guidance for all purposes until the guidance is changed could end up having the counter-effect of making the IRS more hesitant to release the guidance in the first place.  Even if the IRS did continue to release guidance, allowing taxpayer reliance over and above penalty protection could incentivize the IRS to release guidance in a more taxpayer unfriendly manner, which, as Professors Blank and Osofsky have observed, could cause taxpayers to rely on unfriendly FAQ guidance that puts them in an unfavorable tax position that their reliance causes them not to realize.

While that concern does give me pause in wishing that the IRS had adopted a position that taxpayers are entitled to reliance on FAQs for all purposes, I do find myself still wishing that the IRS had moved more toward the Abreu/Greenstein proposal.  But, perhaps the IRS could have found a middle ground between penalty defense and complete reliance for all taxpayers.  For me, this middle ground would recognize that the service obligations that the IRS owes the economically vulnerable are, frankly, higher than the obligations owed to more sophisticated taxpayers.  It would also recognize that, in addition to failing these taxpayers on the service side, the IRS has also failed these taxpayers on the enforcement side by auditing them at much higher rates than their incomes or percentage of the taxpaying population would justify.

Therefore, while it might be too chilling for the IRS to have to stand behind all written guidance in effect for all taxpayers, is it that unreasonable to ask the IRS to stand behind this guidance for all purposes for taxpayers who are the most likely to depend on FAQ guidance to educate them about social safety-net benefits?  To be specific, I would have liked to have seen the IRS adopt the Abreu/Greenstein model for taxpayers whose incomes for the tax year at issue were below 250 percent of that year’s federal poverty guidelines (the same eligibility standard for LITC representation).  I also would have liked to see the IRS adopt the National Taxpayer Advocate’s recommendation of refusing to assess a penalty for a position taken in reliance on an FAQ in effect for the year in which the return was filed, at least for this subset of taxpayers.  Should the IRS balk at providing this relief towards low-income taxpayers, I would have an extra wrinkle that I would propose—I would give the IRS a way out of having to allow for this heightened level of reliance for these taxpayers by tying it to the IRS’s approach to enforcement against low-income taxpayers. 

My added wrinkle is that the IRS should permit low-income taxpayers to have a higher level of reliance protection for FAQs for as long as the IRS chooses to subject them to heightened levels of enforcement.  As Kim Bloomquist has persuasively demonstrated, “the IRS audits EITC filers at a rate four times higher than non-EITC filers with similar incomes.”  That disparity in audit rates is uncontroversially unjustifiable, and allowing low-income taxpayers to have a higher degree of reliance on all published IRS guidance for as long as this enforcement disparity persists would be a small step towards IRS perhaps recognizing that it in fact has its priorities exactly backwards when it provides more enforcement and less service towards the economically vulnerable.

The IRS took an important step last week towards making its use of FAQ’s much fairer to all taxpayers, and the IRS deserves to be celebrated for this.  Nevertheless, I do hope like other commentators that this might represent the first step towards a more just use of FAQs and, specifically, an acknowledgement that, if the IRS is going to provide heightened enforcement scrutiny of low-income taxpayers, it should be providing heightened service that it stands behind as well.

IRS Recent Guidance on FAQs: Too Little, Too Narrow

Today we welcome back guest bloggers Alice Abreu and Richard Greenstein, Professors of Law at Temple’s Beasley School of Law in Philadelphia, with the third installment in our mini-series on IRS FAQ.

On Friday, October 15, 2021, the IRS finally issued guidance addressing the controversial issue of taxpayer reliance on positions the agency announces in FAQs, which are published on its website (IR-2021-202, IRS updates process for frequently asked questions on legislation and addresses reliance concerns). Acting Chief Counsel William Paul foreshadowed this development at the NYU Tax Controversy Forum back on June 24, as Nathan Richman reported in Tax Notes. Importantly, the new guidance accepts two of the three recommendations made by the National Taxpayer Advocate Erin Collins in her July 7, 2020 blogpost. But, unfortunately, the new guidance suffers from the same shortcomings that attended the NTA’s recommendations.


As we observed in a PT post a few days after NTA Collins posted her recommendations, those recommendations did not go far enough to address the problem of taxpayer reliance on IRS informal guidance, and protect taxpayer rights. NTA Collins began by positing a taxpayer who wants to know whether an expense is deductible and finds an FAQ on the IRS website saying it is, only to discover when audited that the IRS has changed its position and the examining agent not only denies the deduction but imposes a penalty. As we explained,

We agree with NTA Collins that “[i]f the Taxpayer Bill of Rights is to be given meaning, this scenario violates ‘The Right to Informed’ and ‘The Right to a Fair and Just Tax System.’”  We also emphatically agree that “[i]t is neither fair nor reasonable for the government to impose a penalty against a taxpayer who follows information the government provides on its website.” But we think that by focusing on the penalty, NTA Collins understates the unfairness faced by the taxpayer in this scenario.  Of course it is unfair for a taxpayer to be penalized for doing what the IRS itself said she could do, in a document specifically intended to guide taxpayer actions. And it is also unfair for the IRS to take down the document so that the taxpayer cannot offer it in support of a claim that she had “reasonable cause” for the position that resulted in the alleged underpayment, as provided by IRC § 6664(c)(1), which should allow her to avoid the penalty without reaching the question of whether the FAQ constitutes substantial authority for the taxpayer’s position. Indeed, removing an FAQ from the IRS website after a taxpayer has relied on it may also violate the taxpayer’s “Right to Challenge the IRS’s Position and Be Heard” because the IRS is thereby interfering with the taxpayer’s ability to provide adequate documentation for her position.  We therefore heartily endorse the NTA’s recommendation that the IRS create and maintain an archive of all FAQs issued.

Because the IRS’s recent announcement follows two of the NTA’s recommendations, both our endorsement and our criticisms of those recommendations apply to the announcement as well. First, the announcement does too little, because it respects taxpayer reliance for penalty purposes only. As we develop in a forthcoming article, the argument that a taxpayer who relies on statements made by the IRS in a writing issued for the purpose of guiding taxpayers should not be penalized for so doing, is so robust that to state it is to win it. While it is nice for the IRS to confirm that, in a document on which taxpayers can rely, it is hardly something that taxpayers should be popping champagne corks over.

Second, despite its positive movement on the penalty issue, by refusing to stand by the words it has written to guide taxpayers, the IRS is continuing to behave like the Peanuts character Lucy, who entices Charlie Brown to kick the football, only to pull it away just as he is about to do it. Its behavior violates the taxpayer’s rights to be informed and to a fair and just tax system and impugns the legitimacy of both the agency and the tax system it administers. While we would have preferred that the NTA had recommended that “examining agents not retain the authority . . . to challenge taxpayer return positions if an FAQ has been changed,” we welcomed her recommendation that such authority be retained “in limited circumstances” only (emphasis in original), and that, in such cases “examining agents should be required to consider previously issued FAQs.” We therefore wish the recent announcement had followed that recommendation as well. For us, that recommendation was too tentative, but for taxpayers, the IRS’s following it would have been an improvement over its continuing to behave like Lucy.

The IRS’s recent announcement is also too narrow: it applies only to written statements the IRS makes in FAQs, whereas the fundamental problem addressed by the NTA—taxpayers relying on IRS written information intended for their guidance—extends far beyond FAQs. FAQs captured the limelight because the onslaught of pandemic-relief legislation effective upon enactment led to the need to issue interpretive guidance as close to immediately as possible, causing FAQs to multiply exponentially. But the same reliance problem raised by FAQs arises whenever a taxpayer relies on a statement the IRS makes in one of its publications, instructions to forms, Fact Sheets, and even in correspondence or other documents addressed specifically to the taxpayer.

Despite the recent proliferation of FAQs, the amount of all of this other informal guidance must be greater than the number of FAQs. The scant comfort provided by the recent announcement should have applied to other forms of informal guidance as well. Despite the foregoing criticisms, the recent announcement does make progress toward increasing the legitimacy of the IRS: it shows the IRS as capable of responding to criticism even in the absence of a specific NTA recommendation. In her July 7, 2020 blog post NTA Collins criticized the disclaimers included in some FAQs, which stated that “These FAQs are not included in the Internal Revenue Bulletin, and therefore may not be relied upon as legal authority. This means that the information cannot be used to support a legal argument in a court case.” See, e.g. IRC § 199A FAQ. As NTA Collins pithily observed in her blog post, “Why should taxpayers even bother reading and following FAQs if they can’t rely on them and if the IRS can change its position at any time and assess both tax and penalties?” Even though the blog post did not make any specific recommendation regarding disclaimers, the IRS’s recent announcement retreats from the arrogant “we’ve said it but it won’t help you in court” stance of current disclaimers. Henceforth, the IRS will include a “legend” in Fact Sheet FAQs explaining that the FAQ

may not address any particular taxpayer’s specific facts and they may be updated or modified upon further review. Because these FAQs have not been published in the Internal Revenue Bulletin, they will not be relied on or used by the IRS to resolve a case. Similarly, if an FAQ turns out to be an inaccurate statement of the law as applied to a particular taxpayer’s case, the law will control the taxpayer’s tax liability.

The change from “it won’t help you” to “we won’t use it against you” may be subtle, but it is not insignificant. Although we would have preferred a change to “you may rely on it,” and perhaps NTA Collins would have as well, by not dismissing reliance in its entirety, the new language is a step in what we think is the right direction. Thank you, Acting Chief Counsel Paul.

IRS Releases Update on Frequently Asked Questions Part 2

Today guest blogger James Creech brings us his take on the recent IRS news release and fact sheet announcing important changes in the agency’s use of frequently asked questions. Part One in this series can be found here. Christine

As an extended filing day surprise the IRS has released a news release on the role Frequently Asked Questions (FAQ) play in tax administration.  Anyone who has been following the expanded role FAQs have been playing over the last few years, especially in the areas of the Employee Retention Credit and Virtual Currency, will not be surprised by the conclusions the IRS reaches in the press release.


The IRS states that FAQs are not guidance rather they are a form utilized by the Service to quickly communicate general concepts to taxpayers.  From the viewpoint of the IRS, FAQs synthesize authoritative guidance that is binding on the IRS, either through guidance published in the Internal Revenue Bulletin, or the Internal Revenue Code and Treasury Regulations.  The IRS acknowledges that as a general application of the law the statements contained in FAQs may not be perfect and “if an FAQ turns out to be an inaccurate statement of the law as applied to a particular taxpayer’s case, the law will control the taxpayer’s tax liability.”

The most important part of the press release is a statement on what happens if a taxpayer relies on an incorrect FAQ for the purpose of penalty protection.  The press release states “a taxpayer’s reasonable reliance on an FAQ (even one that is subsequently updated or modified) is relevant and will be considered in determining whether certain penalties apply.”  As a practical note the IRS’s reference to updated or modified FAQs is an endorsement of the practice of printing out or saving FAQs that are helpful to a position because once an FAQ is updated the prior version can no longer be found on

Perhaps the most novel point of the press release is that FAQs issued in a press release have more weight than FAQs simply published to without fanfare.  This is an extrapolation of Treasury Regulation 1.6662-4(d)(3)(iii) that lists “Internal Revenue Service information or press releases” as types of authority that can be relied upon for penalty protection even though FAQs are conspicuously absent from the regulation.  Although the IRS as assured practitioners that it does not take positions contrary to FAQs it may be worth saving all of the IRS emails in your inbox in case you ever need to show that certain FAQs were part of an “information or press release”. 

The IRS has stated that in the near future it would begin archiving all FAQs and would release more formal guidance about reliance on FAQs for the purposes of penalty protection.  Until then this press release will have to suffice about the interaction of FAQs, weight of authority, and penalty protection.

IRS Releases Update on Frequently Asked Questions Part 1

Last week the IRS issued a news release and fact sheet discussing its use of frequently asked questions. The IRS’s practice of using FAQs has been the subject of many Procedurally Taxing blog posts. This week we will run a series with different practitioners offering their perspective on the development. Today, we hear from frequent guest contributor Monte A. Jackel, Of Counsel at Leo Berwick. Les

In The Proper Role of FAQs, I discussed certain aspects of the use of FAQs in the tax system. I also wrote a short note in Tax Notes on the same topic at around the same time. See A Question of Two About FAQs (March 2, 2020).

The IRS very recently published an announcement on October 15, 2021 on the subject of FAQs, following up on its earlier promise to provide a more structured institutional approach to the use of FAQs in the federal tax system. See IRS Announcement On FAQs. A Tax Notes story on this announcement followed the next day. Tax Notes Story On FAQs. The announcement explains how the IRS plans to maintain information about when versions of FAQs have been released, as well as whether and how taxpayers can rely on those FAQs.


As noted in the Tax Notes Story On FAQs, the announcement doesn’t go so far as to actually update the very much out of date accuracy related penalty regulations (particularly reg. sections 1.6662-4 and 1.6664-4), “but it does state that FAQs published in fact sheets will satisfy both the reasonable cause defense to tax penalties that allow it and can be part of a taxpayer’s assertion of substantial authority on a tax return. It also says that the FAQs and any resulting changes to them will be announced in news releases.”

I have a few questions about this FAQ announcement. First, does it matter that the pertinent regulatory list of authorities references “press releases” at reg. section 1.6662-4(d)(3)(iii), whereas this IRS announcement references those FAQs which can provide penalty protection as “news releases” that will incorporate the fact sheets published on This should be clarified. However, it is believed that the two terms are intended to mean the same thing.

Second, the so-called “minimum legal justification” for tax shelters under reg. section 1.6664-4(f) requires the use of authorities at a MLTN basis as a minimum standard to establish reasonable cause and good faith when a tax shelter is involved. (The regulations expressly deal with corporate tax shelters because the statute was amended later on to apply to all tax shelters and the regulations do not reflect the statutory change.)

The extent to which this particular provision will be affected by the announcement is unclear given that a fact sheet FAQ issued in the future under the designated news release process could encompass a transaction that could be treated as a tax shelter under section 6662(d)(2)(C). This outdated regulation would have to control over the announcement and so, what now given that the term “tax shelter” as amended in 1997 remains undefined in the regulations to date.

Third, the disclaimer referenced in the announcement is only mandatory for the new FAQs (new legislation and emerging issues) but the reliance as reasonable cause and good faith, or as an authority, applies to all other FAQs, even those previously issued, but those other FAQs need not have a disclaimer. Why not?

Fourth. Why are the new FAQs (called fact sheet FAQs) limited expressly to new tax legislation with the possible expansion to so-called “emerging issues” (which is not a defined term)? It is understandable that new legislation would most often have a compelling need for immediate guidance but aren’t the chances for error on the part of the IRS equally great in this instance?

And what of the so-called “emerging issues”? Perhaps the thought there is that new topical and time pressure items can be showcased as a fact sheet FAQ because the IRS wants initial feedback on the approach it may want to later take in regulations and using FAQs in this manner could easily bypass the Administrative Procedure Act (APA)?

Speaking of the APA. There is currently a dispute in the Sixth Circuit Court of Appeals relating to two opposing district court opinions in that circuit on whether the APA requirement of advance notice and comment for legislative rules applies to IRS notices issued pursuant to regulations under section 6011 with respect to listed transactions. Update on CIC Services: The Scope of Relief Available if A Court Finds That An Agency’s Rulemaking Violates the APA

If the Sixth Circuit decides that such notices violate the APA, then even though it would just be one circuit, confusion would then surely resurface with respect to fact sheet FAQs.

Even though this announcement is not being issued pursuant to regulations granting such authority to the IRS, the question that arises is this; why shouldn’t that be done?  After all, we would not be talking about a long regulation to do this. Is the IRS worried about the result of an adverse Sixth Circuit opinion that would certainly carry over to FAQs?

We shall see.

IRS Violates Taxpayer Bill of Rights by Unilaterally Terminating Installment Agreements Entered into with Private Collection Agencies

On October 14, 2021, National Taxpayer Advocate Erin Collins posted a blog entitled The IRS and Private Collection Agencies:  Four Contracts Lapsed and Three New Ones Are in Place: What Does That Mean for Taxpayers?  The blog contains a number of interesting pieces of information about the Private Debt Collection program, but it also brings to mind many questions.


I have written extensively about the IRS use of private debt collectors.  You can read a few highlights here and here and here.  By way of background, IRC § 6306 requires the IRS to “enter into one or more qualified collection contracts for the collection of all outstanding inactive tax receivables.”   An “inactive tax receivable” is a tax debt

  • that is removed from active inventory because of lack of resources or inability to locate the taxpayer;
  • that has not been assigned for collection to an IRS employee after two years from the date of assessment; or
  • that has been assigned for collection but more than one year has passed “without interaction with the taxpayer or a third party for purposes of furthering the collection of such receivable.”

There are exceptions to the required assignment, including where the taxpayer has income below 200% federal poverty level or is receiving Social Security disability or supplemental security income benefits.  Private debt collectors, under the contracts, are only allowed to locate and contact the taxpayer; ask for full payment or enter into an installment agreement (IA) for a period up to 7 years; or obtain financial information.

On September 22, 2021, the IRS announced that the four existing Private Collection Agency (PCA) contracts expired and it had issued three new contracts – two to “continuing” PCAs (CBE and ConServe) and one to a new PCA (Coast Professional).  Thus, the IRS did not continue contracting with Performant and Pioneer.  The NTA reports the immediate consequence of these contract terminations is that 1,255,541 accounts will be returned to the IRS, and Performant and Pioneer will send a letter to taxpayers who have payment agreements through these two PCAs , saying “we will no longer be collecting this debt on behalf of the IRS.”  (The NTA Blog quotes this language, so I am assuming this is the language in the letter.)

I understand why the IRS has to retrieve these taxpayer accounts from the discontinued PCAs – this is taxpayer and tax return information and with the discontinuation of the contract there is no exception under IRC § 6103 to share this information with those PCAs.  What I don’t understand is why the IRS terminated the streamlined IAs these taxpayers have entered into.  In all the years (decades) I have worked on the PCA program, at no point did anyone say that the agreement to pay was with the PCA; rather, the PCA was collecting on behalf of the IRS.  The PCA was acting as an agent of the IRS and entering into a payment arrangement by standing in the shoes of the IRS.  Thus, even if the agency relationship terminates, there is no basis for the underlying agreement to terminate.  Otherwise, there is no real agency at all if the principal can abrogate a contract just because of a substitution of agent.  Why would I, as a taxpayer, ever enter into an agreement with the agent/PCA if such were the case?   Here, the taxpayer hasn’t breached the Streamlined IA; in fact, the taxpayer has made arrangements to pay their tax debt; and now they are told, “Well, you thought your affairs were taken care of, but they aren’t.”  This is a violation of the taxpayer’s right to finality in the Taxpayer Bill of Rights and IRC § 7803(a)(3)(F).

Perhaps it is technologically difficult for the IRS to recall these accounts and then reissue them to the existing PCAs so the PCAs can continue to “service” the payment arrangements.  But that makes no sense.  In 2013, when the IRS terminated the second round of PCA usage (the first round was in the 1990s), the IRS recalled all of the accounts placed with the PCAs.  At that time it did not terminate any of the IAs that the PCAs had entered into “on behalf of the IRS.”  The IAs remained in force and the IRS continued to collect the payments.  So we know it is technologically possible for the IRS to recall accounts and continue servicing the existing IAs.

Why, then, would the IRS terminate the IAs?  Could it possibly be the IRS doesn’t want to spend any resources “servicing” these IAs?  It would rather have the PCAs do the monitoring and collect their 25% commissions and costs?  If that is the case, then maybe under IRC § 6306 the IRS needs to terminate the existing IAs in order to “assign” them to its new PCA agents.  It would be nice if the IRS would issue its legal opinion or other rationale for why this is so.  Regardless, it begs the question of why the IRS should assign a perfectly valid and performing IA to a new PCA.  Why isn’t the IRS retaining that IA and collecting the proceeds itself?  Recall that the IRS is able to retain 25% of collections by PCAs for its own “special compliance personnel;” and that PCAs can receive up to 25% of their collections for commissions and costs.  It appears the IRS would rather pocket 25% from these IAs itself, and send 25% to PCAs who had nothing to do with these IAs, than to pay over that 50% of collections to the Treasury General Fund.  The lack of an explanation for the decision to terminate the IAs is troubling, indeed, and as a taxpayers who are footing the bill for these payments, we deserve that explanation.

In fact, the NTA reports that through September 30, 2020, the IRS has assigned about $32 billion and 3.5 million accounts to PCAs since April, 2017, when the third PCA initiative began.  Since that time, PCAs have collected only 2 percent of the debt assigned to them (about $580 million).  The IRS, through its “special compliance personnel,” has collected about $345 million in non-PCA debt.  Further, the taxpayers voluntarily paid $43 million within 10 days of receiving a letter from the IRS saying their debt would be sent out to a PCA.  That is, for the price of a stamp (not 50% of the payments), the IRS collected $43 million within 10 days.  I will say this again, as I have been saying for about 20 years:  if the IRS sent monthly bills out to taxpayers like every other credit card company, revolving account, lender, insurance company, and landlord, it would regularly collect something on almost every past due account.  The IRS response to this usually is that it doesn’t have the resources to answer the phone calls that will come in response to the letters.  And my answer to that is to paraphrase former Commissioner Charles Rossotti: Why would you not pick up the phone when someone is calling to pay you money?

At any rate, since its inception the current PCA initiative has apparently collected about $969 million, or 3%, of the total $32 billion in inventory transferred to the PCAs.  Now, the IRS estimates that the gross underpayment tax gap for 2008 to 2010 was $39 billion.  A raw calculation shows PCAs are now holding 82% of the underpayment tax gap.  If we adjust for inflation, the $39 billion in gross underpayment tax gap from 2010 would be about $48.81 billion today, which means the PCAs are now holding about 65% of the underpayment tax gap inventory.  And they are only collecting 2% of that inventory.  All we have done, with the PCA program, is shift the IRS collection queue to the PCAs.  We have not reduced the collection queue in any meaningful way.

And now the IRS is burdening taxpayers who thought they had resolved their debts, including taxpayers who have entered into direct debit agreements to pay their installments.  The letter the terminated PCAs are sending out states, “…your payment arrangement and pre-authorized direct deposit payment schedule (if applicable) has ended, effective [date].  We encourage you to contact the Internal Revenue Service to resolve your account.” That assumes the taxpayer can get through to the IRS on the phone.  And, if the taxpayer does get through to the IRS and enters into the IA through the IRS, the taxpayer will be charged a user fee.  Taxpayers entering into IAs with PCAs aren’t charged a user fee.  (I don’t know how the IRS justifies that; I’d love to see the legal opinion on that one, too.)  At any rate, the taxpayer had an IA that didn’t include a user fee; the PCA/IRS cancelled it, and now to get another IA, the taxpayer has to pay a user fee.  Or, the taxpayer can wait and get sent back to a PCA.  Of course, by then additional interest and penalties accrue.

The NTA explains that if the IRS decides these recalled accounts still meet the PCA criteria, the TPs will be sent out to yet another PCA again, who will contact the taxpayer and try to get payment in full or enter into yet another installment agreement.  If I were a taxpayer who had entered into an IA with one PCA, and now I get another contact from another PCA, (1) I’d be really suspicious this was a scam; (2) I’d want to know why they couldn’t just re-enter me into the IA I had before; and (3) I’d want to know why they were creating this burden on me, since I had already entered into an IA.  Finally, the whole thing looks like the IRS doesn’t know what it is doing – contacting me to tell me the agreement is terminated and then contacting me to tell me I need to make payments and arrange another IA.

None of this bodes well for increasing trust in the IRS.

What should the IRS do to right this violation of the Taxpayer Bill of Rights?  Five things:

  1. Personally contact each of the taxpayers whose IAs through Pioneer/Performant have been terminated;
  2. Apologize profusely;
  3. Reinstate the IA and direct debit agreement (where applicable) waiving the user fee;
  4. Abate any penalty and interest that accrued between when the IA was terminated and the reinstatement; and
  5. Apologize profusely again.

Oh yes, and (6) stop treating taxpayers so cavalierly.

Update on CIC Services: The Scope of Relief Available if A Court Finds That An Agency’s Rulemaking Violates the APA

Following the Supreme Court decision in CIC Services, the matter was remanded back to the district court. Last month the district court granted CIC Services’ motion for preliminary injunction, finding that the Notice 2016-66 was a legislative rule and its issuance violates the notice-and-comment provisions of the APA.  Following CIC Services’ victory, however, it filed a motion to reconsider.

Why would CIC file a motion for reconsideration? Last month’s district court’s opinion narrowly enjoined the IRS from enforcing the Notice against CIC Services. In its motion, CIC Services has requested that the court broaden the relief and issue a national outright injunction that would prevent the IRS from enforcing it against anyone.

Readers may recall that in CIC Services: Now that AIA Issue Resolved, On to Some Meaty Administrative Law Issues I discussed the lurking issue as to the extent of any relief that a court could grant if it were to find that the IRS issuance of the notice violated the APA. In that piece I pointed to an excellent Notice & Comment blog post, Do you C what I C? – CIC Services v. IRS and Remedies Under the APA. In the post Professor Mila Sohoni provides context on the debate within administrative law. She argues that a district court has the power to set aside the Notice for everyone and should not be constrained to focus only on the application of the Notice to the plaintiff.

In the motion CIC Services acknowledges that there is uncertainty as to the scope of relief but argues that the court’s power to vacate the notice is broad (citing to the Notice & Comment blog). It also discusses the particular harm that CIC Services faces in the absence of a national injunction, including how it must incur costs to assist its nationwide clients who still have to comply and how the order “does not explicitly relieve CIC Services of the on-going and compulsory record-keeping that Notice 2016-66 requires.”

This is an important issue not only for tax administration. It has wide implications for administrative law.

Third Time is the Charm for CDP Case

In Dodd v. Commissioner, T.C. Memo 2021-118, the Tax Court decides the merits of petitioner’s case, having twice remanded the case previously.  In the end, Ms. Dodd lost the merits of her case and owes a large tax liability.  The case shows what happens when the IRS fails to properly conduct the Collection Due Process (CDP) hearing and then what happens when it does.  Ms. Dodd, although an administrative assistant at a law firm, went through CDP process for over four years pro se.  We discussed this case during its previous trip from Appeals to the Tax Court here.


Starting in 2013, Ms. Dodd became an investor in Cadillac Investment Partners, LLC (Cadillac).  She was the managing member of this real estate partnership with a 35.5% share of its profit, loss, and capital account.  In 2013 Cadillac sold some property generating a large IRC 1231 gain.  She received a K-1 from the partnership and reported on her return $1,073,312 in 1231 gain, $1,909 in ordinary business income, ($100,739) net real estate income and $201,601 in distributions.  She reported all of these items from her K-1 on her 2013 return which showed a liability of $169,882, that she did not pay with her return.  This self-reported liability leads to the CDP hearing.  Because the amount at issue stems from a liability reported on her return, the CDP provision, as interpreted by the Tax Court, allows her to contest the correctness of her own return reporting.

While she was not a model CDP citizen, Appeals also had trouble dealing with her case.  As discussed in the previous post, it twice assigned the same settlement officer who did not seem well equipped to resolve the proper reporting of a partnership distribution.  On the third trip, referred to by the Tax Court as the second supplemental hearing, Appeals assigned a new settlement officer and paired the SO with an appeals officer who had experience dealing with partnership issues.  This team determined that Ms. Dodd correctly reported the liability on her return.  That determination ending remand number three brought the case back to the Tax Court where this time the court has the tools to make a decision.

In the Tax Court the parties agreed to the necessary facts and submitted the case fully stipulated.  Looking at the facts, the court concludes that she correctly reported the liability on her return.  Thus, no merits relief in CDP.  This merits decision occurred after a de novo review of the facts.

Next, the Tax Court looks at whether Appeals abused its discretion in denying her collection relief from the proposed levy.  It concludes that Appeals did not abuse its discretion based on the information Ms. Dodd provided – which was very sparse.  So, four years and three remands after she began her case, she ends up back where she started.  She now has a determination that her return correctly reported the partnership income and expenses.  The IRS has permission to levy upon her and she may need some relief from levy, but she failed to request that relief in a meaningful way during the CDP process.

Appeals correctly dealt with her merits issue on the third try.  I cannot guess what went wrong the first two times.  As discussed in the prior post, the SO initially assigned to the case moved it quickly both times but seemed incapable of addressing the correctness of the reporting of the partnership items.  That an SO would have difficulty determining the correctness of partnership items comes as no surprise, but the failure on the first two tries to line up someone to help with that aspect of these case seems like a failure of the system.  Perhaps the correct handling of the case on the third try signals a better understanding of the way to handle a merits claim or perhaps it just means that in this case Appeals’ eyes finally opened to the problem presented.

Failure to Timely Raise Financial Disability Argument

We have written on several occasions about the exception to the two and three-year lookback periods of IRC 6511 that exist as a possibility if the taxpayer can show financial disability.  You can find posts on the subject here, here and here.  This year my clinic represented someone making the financial disability argument in Tax Court, where petitioners can make refund claims but do so less frequently than through district court litigation.  We succeeded in obtaining a concession of the refund despite the client’s primary use of providers not described in Rev. Proc. 99-21; however, the case of Schmidt v. Internal Revenue Service, No. 2:20-cv-02336 (E.D. CA. 2021) provides another example in the government’s streak of victories against individuals seeking to extend the statute of limitations through financial disability.  Like the majority of litigants raising this issue, she proceeded pro se.


Ms. Schmidt filed her 2013 return late on February 22, 2015.  On December 15, 2017, she filed an amended return seeking a refund of $31,904.  The IRS sent her a letter informing her that it intended to disallow her claim due to lateness.  She wrote back, obviously confused by the somewhat confusing construct of IRC 6511, arguing that she filed her amended return timely within three years of the filing of her tax return.  She did file the amended return within three years of filing her original return for 2013; however, the filing of the return within three years was not the important fact here.  Most important, as the IRS pointed out, was the three-year lookback rule of IRC 6511(b)(2), which limited her refund to payments with three years.  Since the payments occurred on the original due date of the return because withholding credits get credited on that date, she filed her amended return too late to recover any money even though she filed her amended return within three years of filing the original return.

Once Ms. Schmidt understood the lookback rule, she pivoted and began arguing that she missed the time period for timely filing the amended claim due to financial disability.

Plaintiff acknowledges the Refund Claim did not demonstrate financial disability to the IRS and argues it would have been illogical to submit the information at that time because she was still sick and still meeting the requirements for financial disability for all of 2017.1 In addition, when plaintiff received notice of the IRS’s intent to disallow the Refund Claim, plaintiff believed the IRS was rejecting the Refund Claim for a reason other than the time limits of 26 U.S.C. § 6511(b)(2).  Plaintiff asks the court to consider the evidence submitted with her complaint of her financial disability based on the special circumstances of her case, including the fact that the IRS issued a Private Letter Ruling (PLR) declaring the 2013 disability income tax-exempt.

Now, she hits another roadblock for those seeking a refund – variance.  While I think the court imposes the variance rule against her, it does not use that term, but instead discusses how her refund claim fails to meet the onerous requirements of Rev. Proc. 99-21.  It lists the requirements set forth in the Rev. Proc. and notes that she met none of them.  She submitted no information about financial disability with her amended return.  The court does not offer her a chance to submit it at this point.  Some of the prior cases in which IRC 6511(h) has been raised did allow the taxpayer to supplement their submissions, though in those cases the taxpayer may have engaged in more signaling about the possibility of financial disability than Ms. Schmidt did in filing her amended return.

She appears to have disability issues.  The information in the opinion does not provide a basis for deciding if she might have succeeded had she submitted her request with the amended return.  It also does not make clear whether she has a valid refund claim.  I don’t blame the court for these omissions since that information has nothing to do with the basis for denial of her claim; however, the result is harsh.  A pro se individual will struggle to take the correct procedural steps.  A disabled and sick pro se individual will struggle even more.  The law does not need to require such precision that she must file with her claim a full blown statement as required by the Rev. Proc. and the Rev. Proc. does not need to make the requirements as draconian as it does.

I have sympathy for Ms. Schmidt but the financial disability provision designed to assist people struggling to make life work offers little sympathy.  The mismatch between the purpose for the law and the administration of the law continues.